Like Shakespeare once wrote in the opening soliloquy in Hamlet, “To be or not to be, that is the question” many multinational businesses reach a fork in the road when it comes to choosing to implement a shared service center or centers, have local operations, or use outsourcing for payroll, legal, or other business functions. The indicators to drive clear choices between the options are many times lost in the cloud of business needs and limitations. There are clear scenarios where shared service centers are optimal and where they can be a burden. We will go into the criteria that make deciding to start a shared service center a good approach to consider, but first, let us review a brief foundational comparison.
There are similarities around the value proposition of using a shared service center or outsourcing. Both provide efficiencies by removing redundant processes from your different departments in favor of a single site or provider that can focus on doing it most efficiently. The idea is that your business units can focus on developing a client roster rather than getting caught up in the minutiae of a non-value-add task. Both also thrive on the basic principles of economies of scale. However, from an execution standpoint, shared services and outsourcing could not be further apart.
Large businesses use shared service centers to remove business processes from individual business units to a centralized in-house team. The type of centralization can be by geographic region, or by business process, but typically is a combination of both. Legal, payroll, IT, and HR are common business units that tend to be centralized in some form of the shared service center.
Outsourcing, on the other hand, is when businesses choose to intentionally decentralize a process or processes in terms of ownership by adding an external third party. Although the business is adding another seat to the table with the vendor, they typically are doing so to centralize a set of disparate problems. The value-add can vary from cost savings, time savings, reduction of pain points, or a combination of all. The outsourcing provider is essentially acting as an external shared service(s) center for multiple companies.
For a full list of the some of the high-level points of “outsourcing versus shared service center” take a look at the table in this Wall Street Journal article.
So the big question is, when does it make the most sense to commit to creating a shared service center or centers? Well, shared service centers are used by almost exclusively large businesses who can justify the cost of centralizing business units to reach a far less expensive end goal. Shared service centers are for companies that are so large that they can make their own efficiencies of scale to save money. The question is whether or not you can weather the cost and time/resource thrash that will come about in the centralization process.
Essentially a shared service center works best for large businesses that have a proven global strategy for delivering the services that each of their business units needs, for companies that need to have maximum control, and for companies in a stable market that want to eke out every bit of savings.
Outsourcing, on the other hand, is the way to go when a company is small to medium and lacks the in-house resources and expertise needed to implement a global plan. To build an in-house payroll team does take serious time and cash from your business development. Also, if maintaining compliance in the complex legal framework of the global markets has the potential to cripple a company, it makes sense to offload to a third party. Many companies are forced to use outsourcing services simply so they do not have to own the process adaptation for complex regulations in every country in which they do business. It’s true for both small and large companies alike, they can use outsourcing to rapidly scale up their services and keep their legal risks low.
Contact Celergo to explore the ways we can help you to save on payroll costs, global treasury management headaches, or just need help maintaining compliance on the global scale. Thank you for your attention!
**This article is for informational purposes only. It is not intended to constitute legal advice.